In Brief | Behavioural Economics

Behavioural economics (BE) help us understand how people behave in practice – that humans have cognitive limits and don’t always make rational, economically-sound choices. It is increasingly being applied by governments to design more effective public policies that are based on actual, and not assumed, behaviour. Behavioural economics is sometimes broadly referred to as behavioural insights (BI) or “nudge theory”.

The following resources will introduce you to behavioural economics in the public sector.  Feedback welcome here!

The application of behavioural economics to policy has its origins in the relationship between cognitive science, psychology and economics. It often involves the use of experiment and observation to identify patterns of behaviour and uses these findings to inform policies and regulation. Behavioural insights refers to the application of behavioural economics or nudge theory. Nudge theory rose to prominence in 2008 with the release of the book Nudge: Improving Decisions About Health, Wealth, and Happiness.

Rather than being ‘rational, selfish robots’, humans are often driven by altruistic motives. Nudge theory argues that positive reinforcement and indirect suggestions to encourage non-forced compliance can influence motives, incentives and decision-making at least as effectively as direct instruction, legislation, or enforcement. Wikipedia cites one nudge as the etching of the image of a housefly into men's room urinals at Amsterdam Airport, to 'improve the aim’. See David Halpern’s TED talk on how small changes can make a big difference here.

The US and UK governments were the first instigators of BI units within government. The UK’s Behavioural Insights Team or ‘Nudge Unit’, which is now partly privatised, helped set up the first BI unit in Australia in the NSW Government in 2012. Their latest report  showcases recent projects including sending text reminders for public housing rental payments and cervical cancer screening. Victoria now also has its own unit.

The Australian Government launched the Behavioural Economics Team of the Australian Government (BETA) in 2016. BETA’s mission is to build behavioural economics capability across the Australian Public Service and drive its use in policy design by testing what works, where and in what context.
BETA projects fall across a range of policy areas, including society and wellbeing; economy and industry; education and employment; infrastructure and resources; and aid and security. You can see the latest news from BETA on their website or follow their tweets.

Randomised controlled trials (RCTs) – common in medical trials – are also employed in research areas and in BE, and is often considered the gold standard of trials. In an RCT, participants are randomly assigned either to receive an intervention or not. Random assignment of participants helps to ensure that any differences between and within the groups are not systematic at the outset of the experiment , then they can be compared to analyse the effects of the intervention. See some of the BETA’s trials on the website.

In November 2016, IPAA ACT hosted Behavioural Economics by Default which presented examples that improved policy design with RCTs.  One RCT in the US on the Carrera Adolescent Pregnancy Prevention program revealed 40 to 50 per cent reductions in pregnancies and births for teenage girls who were assigned randomly to take part in the program. Watch the video of our event here and read The Mandarin coverage here. The BETA team has developed an easy to use guide to developing behavioural interventions for RCTs.

In March 2017, IPAA ACT and BETA hosted Harvard University’s Sendhil Mullainathan and Ziad Obermeyer to speak on predictive policy and machine learning. To see more resources, including a video of the event go to our website.
Find out more about Sendhil – watch his TED talk on solving social problems with a nudge here. You can also read about his current research into policy prediction problems  with co-authors Jens Ludwig from Chicago Crime Lab and co-presenter Ziad Obermeyer. Their collective work is summarised in this Harvard Business Review article.

Behavioural economics continues to grow in popularity and is being applied more widely across governments. The OECD recently published a report containing over 100 case studies from 23 OECD and partner countries that finds that BI has moved from being a trend to being actively embraced by many countries across a wide range of sectors and policy areas. Other OCED work on behavioural insights can be found on their website.